India: Government to decide on cotton exports today

After a series of knee-jerk reactions in March, today government again intends to decide on the vexed question of cotton exports that is rapidly acquiring a political life of its own.

There are three sticking points and no one is yet clear on how to tackle them. First, traders are getting restive because export contracts worth Rs 7,000 crore are pending with the DGFT, awaiting scrutiny. However, DGFT now says it will call for more data to sift out deals between traders and their sister companies overseas because these have got the commerce ministry’s goat. Spooked by muck-rakers, neither agriculture Sharad Pawar (representing farmer/trader interests) nor finance minister Pranab Mukherjee is likely to demur.

In other words, further costly delay is guaranteed. The international market has already reviled India for its unpredictable trade policies that corrode trust. Fuming foreign buyers are asking Indian exporters to pay damages for the delay and the demurrage cost of empty containers waiting at port. Hapless exporters have no escape because once the ban is lifted international contract law doesn’t allow them to declare force majeur and exit their contracts. Aggrieved parties are likely to sue DGFT and the government.

The second issue is allowing fresh exports. Again, no ministry has a clear view. Textiles ministry has listed the various options, which include no export, imposing an export duty, and postponing export to October when the new harvest is gathered. But it has made no recommendation.

For agriculture ministry, the real dilemma is how to manage farmer expectation. Farmers are making money even now because cotton prices are well above the MSP. But they know exports will give them a bonanza. The situation in top producer Gujarat is especially tricky because it is headed for assembly polls this year and farmer memories are notoriously long. So Pawar’s choice lies between insisting on exports so that farmers make a killing and silent acquiescence to the status quo.

Finance ministry wants to use an export duty for calibrating volumes to which agriculture is opposed. With little conviction round the table, the final decision may well resemble a roll of dice.

Luckily, everyone is agreed that a buffer stock is necessary. Finance may be horrified at the thought of spending Rs 5,000 crore on buying cotton at inflated prices for which there shall be few takers, given the tattered balance sheets of textile companies. But politically it’s a gem. A buffer stock will lift farm-gate prices, allow traders to offload stocks, and soothe industry with assured raw material supply. How long can the strained exchequer sustain such a mill round its neck is unclear. In short, cotton will remain trapped in a stop-start-go policy. Yet this is not how things were meant to be. Two years ago, government promised a cotton trade policy with all the trimmings of good governance. After a similar export debacle in 2010, government vowed that the new policy would include transparent contract registration, a tariff driven export regulation policy, and a reserve stock policy designed to ensure the textile industry’s viability during cyclical downturns.

But policy goals need the right administrative mechanisms to succeed. To make it work, government should have insisted on a gate-keeping system that would automatically sound the alarm when volumes cross the prescribed limit.

It should have ensured real-time calculation of the correct export duty in a fluctuating market which would be just enough to slow trade, not stop it. And it should have maintained a buffer stock through several state-run companies so that the Cotton Corporation of India alone is not crushed by the financial burden.

Unfortunately, government did none of this. Instead it continued with the same dense registration mechanism that ultimately brought down the system once again. It seems we can learn nothing from our mistakes.

Today’s decisions will matter little because they can’t be a guidance to farmers, exporters or mills on what to expect in the coming months. Honestly no minister has a clue. Since literally anything can happen, the business risks have multiplied manifold.

No wonder then that all stakeholders in India’s cotton economy are hugely disappointed with the UPA-II government. Somewhere along the way, the cotton trade policy switched from being a promise to a threat.